Assets included or not included in EFC calculation.

Paying for College
1

<p>I believe that IRAs are not included as “EFC” assets - but what other assets are also excluded? Annuities? Trusts?
I have read that there is something called “asset protection” of $50,000 (this number must have been set decades ago as it wouldnt keep the wolf from the door very long in retirement) But for a married couple is the excluded amount $50,000 or $100,000? For the sake of argument lets say a couple has bank savings for retirement of $200,000 (not IRA money). I believe that the EFC “capture” is 12% - so is the EFC $12,000 or $18,000 in such a case? </p>

<p>Also isnt the FAFSA calculation ridiculously flawed? Just one example - it seems that a student who lets say earns $15,000 in the summer and after taxes etc saves $10,000. The EFC calculation is a double whammy as the kid gets penalized both for the earnings AND the savings from those earnings…Does the EFC capture 35% of the $15,000 AND 35% of the savings from those earnings! Does that mean the family EFC includes 35% of $15,000 plus $10,000 or $8750 of those $10,000 savings? Does EFC imput Gross or AGI income?</p>

2

<p>IRAs are not included on the FAFSA. Neither are “specially directed” retirement funds (401-K’s, 403-B’s) although the amount you contributed to them in the base tax year is included for the purposes of determing the family’s income.</p>

<p>The asset protection allowance (APA) is supposed to be a reflection of a minimum amount of assets which should be protected before any asset contribution is expected (remember, though, that the FM does not include the home, so if you own your home, the amount you are protecting is much higher). The APA is based on the age of the older parent and is higher for two-parent households than for one.</p>

<p>That said, the amount of the asset contribution from parents is small anyway (usually 5 - 7% of assets in the FM formula and less in the IM formula).</p>

<p>As for the student question, this is an area where you should appeal to the college to stop the double-counting. At MIT, we ask a question on the Profile designed to elicit this (how much of your asset was earned form your summer job) and then we eliminate the double-counting in our own formulas.</p>

<p>The EFC starts with gross figures, but subtracts out taxes paid. From my blog entry on student contribution from earnings:</p>

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<p>Hope this helps.</p>

3

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<p>“Small,” huh?</p>

<p>For self-employed parents not covered by corporate pension plans, their assets are an important part of their retirement plans.</p>

<p>Let’s consider a self-employed family that has accumulated $300,000 in savings which they hope to use for retirement. Assume the family has 2 kids born 4 years apart.</p>

<p>That family will be paying 5 to 7% of that $300,000 every year for 8 years…let’s say it’s 5%. That’s 15,000 per year for 8 years or $120,000 of that original $300,000 in savings.</p>

<p>A big chunk of change.</p>

<p>Yes, of course, annual income is assessed at a much higher rate than accumulated assets, but annual income is a RECURRING annual flow, whereas accumulated assets are the results of many years of savings.</p>

<p>Families where both parents are covered by generous defined-benefit pension plans (e.g., some corporate jobs, many government employees) have a large IMPLICIT asset that goes entirely unassessed by FM and IM. The Profile has questions about the details of all kinds of family assets EXCEPT the value of those defined-benefit pension plans.</p>

<p>Understandably, it’s difficult to assess the value of the defined-benefit pension plans without a huge amount of information (basically, one needs to know how much longer the employee will be working at his job, what his/her salary is likely to be in those final future years, how many years of service s/he has accumulated with that employer, the extent to which the pension contract will index the pension for inflation, etc.) It’s clearly impractical to determine all of that information for a defined-benefit pension plan.</p>

<p>I’d like to hear from Mr. Barkowicz about how he and his colleagues attempt to deal fairly with assessing the relative need of two families with equal incomes but with assets that are difficult to compare. In one case, the parents have defined-benefit pension plans and so they have less need to save for retirement, while in the other case the parents are self-employed and have had to accumulate a significant savings account for retirement. The <em>apparent</em> assets of the latter family may <em>appear</em> much higher than those of the former family, but only because it’s impractical to compute the assets of the former family.</p>

4

<p>Thanks for the invitation to respond. I’ll take you up on it.</p>

<p>First of all, I do believe that the asset portion is small (especially in comparison to what is expected from income). I am not in the position of defending the Federal Methodology (FM) (since Congress doesn’t ask me my opinion on it), and the Institutional Methodology (IM) has a lower base anyway, so I judge the IM to be even more reasonable.</p>

<p>Either model assumes that you actually are spending down the asset as you go, so while the figures you quote assume a straight 5% from $300,000 for each of the 8 years (using your model), the more standard approach would be to take the percentage from the resultant lower asset, so over 8 years I come up with a remainder of $209,501 or an expenditure of $90,499. By the way, this also assumes that the asset remains static over the 8 years (not a likely scenario). Your rate of growth, depending on the type of asset, may be higher or lower than the assessment rate, but still provides an offset to what would be expected in the contribution (even with a relatively small growth rate of 1.5% as an example, in the first year $15,000 might be expected from the FM formula, but the asset will grow by $4,500).</p>

<p>Leaving all of this aside, I did perhaps try to simplify this a bit too much. While you are correct, wisteria, that assets in retirement plans are ignored in both the FM and IM formulas, there are other protections which also come into account when we do our analysis. I might point you to the [post</a> on my blog](<a href=“http://blogs.mit.edu/barkowitz/posts/5655.aspx"]post”>http://blogs.mit.edu/barkowitz/posts/5655.aspx) on the parent contribution from assets for a more detailed look at the other asset protections that are used.</p>

<p>Being self-employed does not prevent you from establishing a specially designated pension plan of your own (either a SEP IRA, Keogh, or other plans). In all cases, programs in specially designation retirement plans are ignored by both formulas.</p>

<p>Additionally, you should (and can) appeal if you feel that your situation warrants a closer examination. One avenue to explore would be your preparation (or lack of) for retirement, although not all colleges will be amenable to hearing this as an appeal topic. At MIT, we would hear this case and examine the issues (like those you raise in your final paragraph above). We would look at the family’s relative strength overall, and try (as we always do) to look fairly at the family.</p>

<p>Hope this provides some clarity.</p>

5

<p>wisteria:</p>

<p>you are right, there are a multitude of “unfair” items in the financial aid models…any self-employed person, paying both sides of FICA, self-funding retirement (limited by the rules of SEP/IRA), paying one’s own health insurance and expenses, having no paid holidays/ sick days can contend that it is “unfair.” </p>

<p>I felt this way a few years ago, now the longer I read these boards, the more I realise that there is no way it can be fair, there is always some one who can game the system, always some one who beenfits more from the same rule, or that family who blows all their money whilst you saved and were frugal and then they get more money than you!</p>

<p>I think one of the most striking “unfairnesses” is that only the very rich and very poor can afford the expensive schools- full ticket or full-ride. It is simply too pricey to be a responsible choice for so many middle class people. That does not feel good, but I don’t know how to fix it.</p>

<p>The best I can think of for self-employeed people is to review with your accountant any ways to keep your income as low as possible in the university year, not by cheating, but by planning reinvestment in the business, etc. Max out SEP/IRA (though those contributions are added back into income), max out cash value life insurance, pay off all debts, including your home for FM schools.</p>

<p>You can contend the assets are for your retirement, but my brother has several real estate rentals for just that reason and has not had any luck with public schools caring that he has no other retirement! So, yeah, that really does seem unfair, as their are real limits on IRA/SEP contributions. I do think that private schoosl such as MIT have more flexibility to consider your situation, but the guy who has a definted bene pension is so far ahead of you, they simply could/would not adjust for that! Hmm, at least you have the flexibility of being self-employed, right ;)</p>

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<p>barkowitz has a clear explanation
As far as I remember- assets are not considered that much- real estate that you own may be considered- but the income that you get from that real estate is probably going to come into play much more than if it was just a summer place.
IRAs are not considered, but income that is transferred to IRA is considered to be available for tuition.
I think people that can afford to have real estate income are going to come out ahead in the long run ( and that is why they do it I imagine)
They are probably going to be the only ones that have retirement :wink:
Our retirement fund lost tens of thousands of dollars after being built up carefully for years, and is only now slowing building back up again.
Real estate seems to be the only thing that is appreciately steadily.</p>

<p>Finaid may not take into account that your rental properties are going to cover your retirement, but neither does it take into account that we have had huge losses in our retirement fund.</p>

7

<p>Student income and assets are treated pretty severely in the financial aid formulas. The thinking being, I guess, that a ‘typical’ 18 year old doesn’t have any financial obligations more important than his/her education. No mortgage, no kids (one hopes), no utility bills, probably no medical insurance premiums to worry about. So much of his assets, and much of his income is correctly earmarked for college, and added to the EFC.</p>

<p>There’s no asset protection allowance for the student-- so they’ll want to take 34% of any of the student’s liquid assets, each and every year (Federal Methodology. IM is 25% per year). Under FAFSA the student can make about 2,400 per year after taxes before they start assessing the income, though.</p>

<p>So, under Federal Methodology, if a student made $2,400, and spent it on whatever (books, trip, gasoline, car) before the FAFSA was filled out, the student wouldn’t contribute anything to the EFC.</p>

8

<p>Does MIT give an asset allowance like Princeton or Yale? Princeton does not treat home equity as an asset and give $140,000 allowance for a family renting an apartment while Yale gives $150,000 for asset protection including home equity. If MIT does not give any home equity allowance, it might be at least 8,400 more expensive per year compared with these two schools and is also more expensive than other top 20 schools using FAFSA. For 8 years (two kids), the difference of $67,200 might cause a 3-year delay in retirement for the parents of a middle class family. With national average house price around $200,000 and most middle class families put their saving in their primary residence, it seems to me a reasonable home equity allowance should be considered.</p>

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<p>The question is not exactly as you describe it. </p>

<p>Princeton (and Harvard) do not consider home equity in their review.</p>

<p>MIT (and Yale) do consider home equity, but in a very limited way (I would again refer you to my blog which has a great deal of information on how we consider parental assets, but I will reprint a section here):</p>

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<p>So, fftd, you see it is not quite as simple as you have indicated in your post.</p>

<p>Sorry for the long post, but it needed a long explanation.</p>

10

<p>Barkowitz,
Thank you for your time and the long post, but I still can not find the answer I want. I know Princeton and Harvard do not consider home equity in their review. Yale gives an allowance $150,000 of a family’s financial assets (began in 1998) as shown in
<a href=“http://www.yale.edu/opa/newsr/98-02-05-02.all.html[/url]”>http://www.yale.edu/opa/newsr/98-02-05-02.all.html&lt;/a&gt;
But I can’t get an approximate number from your CA formula since I don’t have the mathematic equations of the formula. Thanks!</p>

11

<p>fftd, the $150,000 is old news actually (look at the date – 98-99). Since 2002-03, Yale (along with MIT) has been part of the 568 group (as has MIT) and uses the methodology described above. </p>

<p>The reason you cannot get an easy answer here is because there isn’t one. Each family will have a different set of allowances based on the factors I described above. Additionally, home equity treatment (at least at the 568 schools) will protect some part of the equity based on either the family income or the year of purchase / purchase price.</p>

<p>In short, the refernce you are looking at is out of date. You can always call Yale and ask, but I am not aware of any automatic offset any longer.</p>

<p>BTW, the web site for the 568 group is <a href=“http://www.568group.org%5B/url%5D”>http://www.568group.org</a>.</p>

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<p>As a point of reference compare these two notes, one for the 2001-02 year and one for the 02-03 year:</p>

<p>2001-02 – <a href=“http://www.yale.edu/opa/newsr/01-09-05-02.all.html[/url]”>http://www.yale.edu/opa/newsr/01-09-05-02.all.html&lt;/a&gt;
2002-03 – <a href=“http://www.yale.edu/opa/newsr/02-02-13-04.all.html[/url]”>http://www.yale.edu/opa/newsr/02-02-13-04.all.html&lt;/a&gt;&lt;/p&gt;

<p>You’ll notice the language about the $150,000 was dropped as they moved to the new financial aid methodology which was more generous overall.</p>

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<p>One asset that is NOT counted as an asset for financial aid calculation is any cash value insurance. I believe that annuities with insurance companies are also exempt.</p>

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<p>Can someone please explain trusts to me? How are they counted? I know its probably been mentioned but Id like to know?</p>

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<p>Are most other top universities part of these “568 schools”? If so then that’s great news to me, as most of my college money is in my name and not my parents’</p>

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<p>568 Presidents’ Group Member Institutions:</p>

<p>Amherst College
Boston College
Brown University
Claremont-McKenna College
Columbia University
Cornell University
Dartmouth College
Davidson College
Duke University
Emory University
Georgetown University
Grinnell College
Haverford College
Massachusetts Institute of Technology
Middlebury College
Northwestern University
Pomona College
Rice University
Swarthmore College
University of Chicago
University of Notre Dame
University of Pennsylvania
Vanderbilt University
Wake Forest University
Wellesley College
Wesleyan University
Williams College
Yale University</p>

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<p>Wisteria ans Somemom, both are correct. Does the F in FAFSA stand for FIASCO by chance?
The FIASCO rules appear to be geared towards families that have corporate or government pensions - if you are a self reliant family required to save for old age you are considered a cash cow and dont qualify for aid. But the FIASCO formula would give more aid to a similar family WITH a Fortune 500 pension scheme…go figure.
Also a family that unwisely saves for a child in an UGMA account is subjected to yet another of the many many travesties of justice as not only does the FIASCO formula it not consider the effect of capital gains taxes but the FIASCO formula captures 35% of the gross for the EFC - the 35% demonstrating that the FIASCO formula reckons a college education is only 3 years? Huh? Why not 25% - or 16% as 40% of students take 6+ years to graduate.
These FAFSA these rules are so pedantic that maybe we can be pedantic in return - if there are savings in the students name couldn’t a child (over 18) legally give his/her parents/sibling $11,000 each in gifts in a given year to lessen the FIASCO impact?</p>

18

<p>Grant-</p>

<p>I can’t address your other issues, but on the 35% of the student’s assets:</p>

<p>If a family does dedicate 35% of the student’s assets toward college education for each of the first thee years (although there is no obligation to do so), that still leaves 27% of the original amount available for the fourth year of college. And the EFC will decrease, and aid will increase (other things being equal) during each of these years as the student’s assets decline.</p>

<p>It seems odd at first, but the math does make some sense.</p>

<p>Also not considered is that most college students work during college, allowing them to offset some of their paid down assets as college progresses.</p>

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<p>“the FIASCO formula captures 35% of the gross for the EFC - the 35% demonstrating that the FIASCO formula reckons a college education is only 3 years?”</p>

<p>If you have $100 saved, the first year you pay $35. The second year you have $65, and you pay 35% of THAT, not the total $100!!! So say that is about $23. The third year you take 35% of $42, or about $15. Then you have $27 left the fourth year.</p>

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<p>Right – and as I recall it’s actually 34% each year under the Federal Methodology, and a lesser amount under the IM.</p>